ACCA Management Accounting 5 — Questions and Answers
Question 1: In decision-making under uncertainty, which technique assigns probabilities to different outcomes to calculate an expected value?
- Sensitivity analysis
- Maximin criterion
- Expected value analysis (Correct answer)
- Payback period analysis
Correct answer: Expected value analysis
Expected value analysis weights each possible outcome by its probability and sums the results to give a single decision criterion.
Question 2: A company is deciding whether to make or buy a component. The relevant costs for the make-or-buy decision include:
- All fixed overhead currently absorbed by the component
- Only variable costs saved if the component is bought externally
- Incremental costs of making plus any opportunity costs of the resources used (Correct answer)
- The historic cost of the machinery used to produce the component
Correct answer: Incremental costs of making plus any opportunity costs of the resources used
Relevant costs in a make-or-buy decision are the incremental (avoidable) costs of making plus any opportunity cost of the resources that would be freed up.
Question 3: Transfer pricing between divisions of the same organization is primarily used to:
- Maximize total tax paid by the group
- Evaluate divisional performance and motivate divisional managers (Correct answer)
- Calculate the total external selling price of the final product
- Determine the market price for the product
Correct answer: Evaluate divisional performance and motivate divisional managers
Transfer prices affect the reported profit of each division, so they directly influence how divisional performance is measured and how managers are motivated.
Question 4: Return on Investment (ROI) for a division is calculated as:
- Net profit after tax ÷ total assets
- Controllable profit ÷ controllable net assets × 100% (Correct answer)
- Gross profit ÷ revenue × 100%
- EBITDA ÷ capital employed × 100%
Correct answer: Controllable profit ÷ controllable net assets × 100%
Divisional ROI = controllable (divisional) profit ÷ controllable net assets × 100%, focusing only on factors within the manager's control.
Question 5: Which of the following statements about Residual Income (RI) is CORRECT compared to ROI?
- RI encourages managers to reject projects that would increase overall company value
- RI is always expressed as a percentage, making inter-divisional comparison easier
- RI encourages acceptance of any project that earns above the cost of capital (Correct answer)
- RI ignores the cost of financing assets employed
Correct answer: RI encourages acceptance of any project that earns above the cost of capital
RI = controllable profit − (cost of capital × net assets); any project earning more than the cost of capital increases RI, aligning divisional and company goals.
Question 6: A company uses standard costing. The fixed overhead volume variance measures:
- The difference between actual and budgeted fixed overhead expenditure
- The difference between absorbed fixed overhead and actual fixed overhead
- The over or under absorption caused solely by actual output differing from budgeted output (Correct answer)
- The efficiency with which labor was used to produce output
Correct answer: The over or under absorption caused solely by actual output differing from budgeted output
The fixed overhead volume variance compares absorbed overhead (based on actual output) to budgeted overhead, reflecting the effect of actual volume differing from budget.
Question 7: Which of the following best describes a 'shadow price' (dual price) in linear programming?
- The price at which a product should be sold to maximize profit
- The increase in the value of the objective function if one more unit of a scarce resource becomes available (Correct answer)
- The cost of purchasing an additional unit of raw material on the open market
- The reduction in profit caused by producing one fewer unit of a product
Correct answer: The increase in the value of the objective function if one more unit of a scarce resource becomes available
The shadow price represents the maximum extra amount a company should pay for one additional unit of a binding constraint resource, as it equals the improvement in the objective function value.
ACCA Management Accounting 5
In decision-making under uncertainty, which technique assigns probabilities to different outcomes to calculate an expected value?